Previously, consumers who invested for retirement had to manually update and re-allocate their portfolios as they aged. This proved to be very cumbersome for individual investors and thus target date funds were developed. Target date funds provide investors with an efficient and easy way to invest for their retirement. Target date funds relieve consumers of the need to constantly monitor investment portfolios and manually manage asset allocations since these tasks are performed automatically for the investor. Many of these target date funds are offered through employer-sponsored 401(k) or IRAs through which employee investors can find the appropriate target date fund that matches their respective anticipated retirement dates.
Target date funds help eliminate the confusion many employees and investors experience when faced with too many mutual fund choices in their typical 401(k) offerings. Generally, a target date fund is comprised of a predetermined mix of cash, bonds and stocks which changes as the investor ages. The target date fund's name generally includes the retirement year, and the funds are usually spaced at five years increments (e.g., 2010, 2015, 2020, 2025, etc.).
Target date funds provide automatic routine rebalancing of the investments held in the portfolio. As the investor ages, the investments are re-allocated towards a more conservative investment mix. The general theory is that as the retirement date approaches, the increasingly conservative asset mix will provide the necessary mix for security, stability and managed growth by progressively decreasing the fund's holding in more volatile equities.
Generally aggressive type target date funds have higher percentages of the portfolio allocated to stocks. The term “stock,” as used therein, should be understood to include any equity instrument, including any exchange-traded equity instrument. These funds are also referred to based on their specific stock to fixed income (such as bonds, cash, etc.) ratio. For example, in a 40/60 mix, the particular fund will have 40-percent stocks and 60-percent fixed income holdings. Thus, a hypothetical target date fund may move from a progressively from a 70/30 mix, to a 60/40 mix, to a 50/50 mix and then to a 40/60 mix as the investor ages. In another example, an investor purchasing a target fund in 2010 would initially have 90% of the fund invested in stocks (more aggressive). In 2030, such a fund would be made up of 80% stocks, a slightly less aggressive approach. Last, in 2050, that fund will be close to 50% stocks and 50% bonds, an extremely conservative and secure approach but at the expense of quite a bit of potential return upside. Generally, the security of fixed income investments is preferred as the investor approaches retirement. As this conventional target date fund asset allocation progresses, the investor exchanges security for decreased upside since as the stock mix in the fund decreases, so does the potential for increased returns. This type of conservative investment allocation progression can negatively impact the size of the accumulated wealth which an investor can accumulate both pre-retirement and during retirement. Such wealth accumulation is necessary to provide regular income to fund essential living expenses such as food and housing costs, retirement activities and health care expenses which may increase as the investor ages.
Referring to FIG. 1, a prior art system for administering a conventional target date fund is shown. In the prior art, a computer or server 100 administers a target date fund 120 which is automatically configured to reallocate the asset mix of stocks and bonds according to a selected time frame that is appropriate for a particular investor's retirement plan. In the prior art, the ratio of stocks to bond held in the target fund is reallocated to proportionally reduce the stock or equity type holdings in relation to the bond holdings such as in the following order: 70/30; 60/40; 50/50 and 40/60. Generally, as the prior art investment allocation path or so called “investment glidepath” progresses and approaches the investor's anticipated retirement age, an ever increasing percentage of the holdings will be composed of non-equity or non stock related investments such as bonds, cash, etc. This strategy effectively reduces the volatility and short-term investment risks for the investor but sacrifices the greater returns expected of higher equity holdings and the associated larger nest eggs which could have been built up in the years approaching retirement.